Answering Your FAFSA Questions

Now that we’re officially into the 2015-2016 FAFSA season, I wanted to share some questions that I’ve gotten about financial aid forms via my blog and my popular online courses for professionals and for parents. If you have your own questions, please leave them in the comment box below.

The book was written by Mark Kantrowitz, one of the nation’s top financial aid experts, and David Levy, the former financial aid director at Cal Tech.

Answering Your Questions

Here is a tiny sampling of the financial aid questions that I’ve been getting along with my answers…

Mom’s question:

Try as I might I still can’t get my hands around the whole financial aid picture. We completed the FAFSA and CSS/Financial Aid Profile and were amazed to see that the FAFSA family contribution amount was way more than we could actually afford! Does this mean that this is the lowest cost possible for schools with a larger price tag, merit scholarships included?

My son did apply to 2 private schools that use the institutional methodology, which I believe if admitted would give him the best financial packages. My husband makes a good salary, but we are not homeowners and do not have much outside of our retirement plan. Am I right about this? Lastly, my son did apply to 1 state school that we could afford without financial aid. At this point, we’re waiting to hear back from all the schools.

Answer:

Lots of parents are surprised when they discover what their Expected Family Contribution is. If you don’t know what that term means, read one of my previous posts:

Experts have rightfully complained that the methodology used to generate EFC figures for millions of families is flawed. A family’s EFC isn’t always going to be fair. In fact, it’s quite likely that the EFC won’t pinpoint what a family can truly afford for college. And it’s no wonder. Congress decides what’s in the EFC’s secret sauce.

The formula does play favorites. The methodology, for instance, favors homeowners, aggressive retirement savers, small business owners, teenagers of divorce and rural Americans. That said, the biggest factor determining an EFC is usually the family’s income.

The FAFSA doesn’t ask if you own a home, which is great news for homeowners. Since you don’t own a home, this benefit won’t help you. The CSS/Financial Aid PROFILE does, however, ask about home equity.

Your EFC indicates what you will have to pay, at a minimum, for one year of college.

Let’s say that you have an EFC of $40,000 and the school costs $40,000. That means you would not receive any need-based aid. Families with a high EFC, however, are eligible for merit scholarships from schools. For instance, the school might award a teenager a $12,000 merit scholarships, which would drop the cost from $40,000 down to $28,000. The vast majority of schools give merit scholarships to affluent students.

Faith’s Question

I am not 100% clear: do investments in qualified retirement accounts (e.g., 401K, SEP, ROTH) in the BASE year get counted as part of the family’s AGI?

If so, and if the family is able to contribute a substantial amount to a qualified retirement account in the year PRIOR to the base year, that would allow them to shelter more money before beginning the 4+ years of filling out financial aid forms. Correct?

My Answer:

Retirement assets do not get counted in the financial aid formulas, but family’s prior year’s contributions to retirement accounts do get counted as untaxed income and these contributions are added back to their adjusted gross income in the income portion of the aid formula.

Here’s an example:

Let’s say parents have $250,000 in retirements account. This money will not impact financial aid when a families applies for aid. But let’s say the parents contributed $10,000 to retirement accounts in 2014. When they apply for aid in 2015, that $10,000 in contributions will be treated as the parents income.

The best way to avoid this is to do what you are suggesting. Contribute a lot of money into a retirement account before the base year. So if the child will be applying to schools for the 2016-2017 school year, 2014 would have been the year to invest heavily in a retirement account since these contributions would not show up on any financial aid forms.

John’s Question

I wonder if you have any advice for someone who has very low current income but very high net worth. Our EFC is very high using the FAFSA (especially the Profile method) due to our taxable account balances and home equity. It is close to full cost of most colleges.

Are there any schools that would not consider our assets but only income? John

My answer:

Most schools exclusively use the FAFSA and the FAFSA does not ask about home equity of a primary home so that’s not an issue.

In addition, if you have a lower adjusted gross income — below $50,000 — you can qualify for something called the Simplified Needs Test, which doesn’t require that you disclose assets on the FAFSA. To be eligible for the Simplified Needs Test, you must be able to file a 1040A or 1040EZ tax form. Sometimes with high valued assets, however, capital gains could require that you file a regular 1040.

At some FAFSA-only colleges, however, if you qualify for the simplified method, you will get federal aid (loans, work study and a Pell grant) for some of your award package since your EFC will be low, but for the school’s own institutional funds, (the good grant money that doesn’t have to be repaid), it might look at the assets regardless of the simplified method.

While you might be able to avoid disclosing your assets on the FAFSA, you wouldn’t be able to do this on the PROFILE, which delves deeper into a family’s finances. The PROFILE is used by 249 schools that are almost all private.

Barry’s Question:

How about a post on the FASFA and financial aid for returning students?

There is a section of FAFSA which asks for the student’s financial information and has a couple of questions about work study and any scholarships received that “were reported to the IRS” or some such language. This worried us until we called the college fin aid department at Oberlin College and they explained that we did not need to fill in the scholarship received from the college itself, but we did need to report our daughter’s earnings (only a bit over 1k) in the federal work/study program.

Anyway, just an idea for you to consider.

Answer:

Thanks for the idea Barry. All work-study earnings are taxable income and must be reported as such. Students are supposed to report work-study earnings in the FAFSA’s Additional Financial Information section. The good news is that work-study earnings are excluded when determining a student’s financial need.

And just as Oberlin told you, institutional scholarships from the college should not be reported on the financial aid form.

Learn More…

If you would like to discover much more about financial aid and how to find generous schools, I’d recommend signing up for my next Shrinking the Cost of College. If you want to be on the notification list when I release more information about the courses that start in February, please send me an email at Lynn@TheCollegeSolution.

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I am divorced and remarried. I have a part time job making only about $21000 and I file single 1040ez and my husband makes about $67000 and files head of household and lists my daughter as a dependent and not me. Does this make a difference in how aid is calculated?

We have full legal rights as parents of our granddaughter. She has lived with us since birth and currently receives SSI benefits of $741/month. She is not adopted by us and is considered an independent child. Does she have to claim the SSI benefits as income and list that total on the FAFSA form? Thank you

I am an eligible non-citizen and I am filling out the FAFSA electronically. The 18th question on the Student demographics section( the question about student’s state of legal residence) gives me a lot of trouble to fill in because I am a citizen of a foreign country and whenever I key in ” foreign country” as my response to that question, I am told that my response is invalid. What do I do?

I am dislocated worker with income of $29K in 2014. Due to simplified EFC calculation, I skipped the asset question on FAFSA. However, my son’s school is asking us to disclose all the asset we have. When I called them and informed them, we have qualifies for simplified EFC & do not need to answer asset questions, they told me, they still need to verify it. When I asked them, which grant scholarship you need that information, they told me for all, including federal & state grant. Can you please shed some light on the topic ? Can you please help me with rule/law that exempt simplified EFC people from such scrutiny ?

Hello Lynn,
First off, thank you so much for your insight into the college process! I was accepted into one of my top schools for a direct Physician Assistant program. Unfortunately, this school costs a pretty penny… as in a projected 60k more (in total) than my other schools. It’s a 6 year program so I’m looking at about 250k in total (including room and board for the first 4 years). My parents have made it clear that they will not contribute more than 80k. I know that financial aid- aside from loans, is out of the window because of where my parents fall on the income bracket. What should I do? Thank you in advance!

My advice would be to attend a much less expensive school and then apply to a physician’s assistant program. You won’t even know if this is a program that you will want to pursue once you get into college. This is too much debt to take on. Once you do graduate from college with debt, check out the federal Pay As You Earn Plan for students.

Over $500,000 a year filing jointly. Maximum 401k contributions. seven figures in assets. Admission people say to still file a FAFSA. In some cases, schools say I must submit a FAFSA to accept merit money. I am against filing a FAFSA for privacy reasons. What should I do?

If your child wants to attend a school where it requires filing the FAFSA to obtain a merit scholarship, you would lose out on the money. I don’t understand why you would want to walk away from a merit award.

When my youngest graduates from high school in 3 years we plan to move closer to the city. I’d prefer to rent rather than buy but am unsure how this will affect financial aid eligibility. If we sold our current home and invested the proceeds would this hurt our chances for financial aid? Would it make any difference if we held onto our home and rented it? Your thoughts would be greatly appreciated!

Hi Lynn O’Shaughnessy, I started school in 2012, I was unemployed then and I am now. I have a 5 year old and I just go married. Do I need to change my status? Will my Financial Aid change? We cannot afford college out of pocket. I am so worried all my accomplishments and my goals will be over. Thank you soooo much for your time!!!

When you file the FAFSA this year you will have to include your spouse’s income and assets on the financial aid application. Whether this will disqualify you for need-based grants, such as the federal Pell Grant, will depend on your combined income and assets.

My husband’s ex wife is wanting to include his income on their daughter’s FAFSA application and won’t say why… Am I correct that since they have been divorced for 14 years and she is the custodial parent, that she should only include her income and assets to get the best results for their daughter?

Only the custodial parent would share his/her financial information on the FAFSA. So the mother should not share her ex-husband’s financial information and, of course, she wouldn’t have access to it anyway. If the ex-wife has since remarried, this later spouse’s financial information would also have to be included on the FASFA.

Thanks Lynn! I did see in the newest doc for the 2014/2015 school year, that BOTH parents, regardless of divorce or separation, are to include income. This was noted as a change for this year’s form, and I’m sure, will impact any assistance our kiddo will be receiving….

“Starting with the 2014-2015 award year, parents who are divorced or separated but living together are treated the same as married parents, with financial information required from both parents. The FAFSA focuses on the relationship of the student to the parents more so than the relationship of the parents to each other.” Page 59 of Filing the FAFSA from Edvisors….

I don’t think that this FAFSA change will impact many people. Both divorced or separated parents will have to share their financial information on the FAFSA only if they are still living together.
Lynn O’Shaughnessy